On Wednesday of this week, GDP figures released by StatsCan reflected a soft Canadian economy in the last quarter. Output growth stagnated in Q3, remaining at our forecast of an annualized 1% growth rate, but well below the Bank of Canada’s 1.5% estimate. Moreover, GDP per capita has continued to contract for eight of the last nine quarters. This has given the Bank of Canada ample opportunity and justification to make another 0.50% rate cut in December. Monetary easing by the Bank of Canada takes time to impact the economy and prevailing interest rates remain high (think fixed mortgages, existing business loans, etc.). It is our expectation that economic conditions continue to look soft in the near term, however economic activity should pick up meaningfully in the second half of 2025. Moreover, a sluggish economy will ensure that inflation does not tick up again, echoing Tif Macklem’s sentiments last week that inflation risk has normalized.
Overseas in China, preliminary results for October are indicating that the significant stimulus spending by the government is helping to improve the manufacturing and housing sectors. The Caixin manufacturing PMI rose unexpectedly into positive territory from 49.3 in September to 50.3 in October, ending five months of contraction in the sector. (Note: Purchasing Managers Indexes (PMIs) indicate the sentiment in a particular industry/sector, with 50 and above reflecting a positive outlook) Another positive indicator was residential property sales, which jumped 73% MoM in October. This is impressive considering the Chinese housing market has been tumultuous since the Evergrande crisis arose in 2021. In 2024, exports in China have been the main driver of economic, rising to near record highs. However, this dramatic improvement in export activity is threatened by potential U.S. tariffs of 60% on Chinese goods should the U.S election result in a second Trump administration.
Speaking of the upcoming election next week, the level of uncertainty continues to be high as polling data indicates both candidates are statistically tied. An October 31st poll from FiveThirtyEight.com showed Harris ahead by 1.2% over Trump nationally, however in swing state polling Trump has a narrow lead over Harris. Both results are within the statistical margin of error of 3%, which fundamentally means the election is a toss up and greatly dependent on voter turnout for each candidate. This has most certainly contributed to increased short-term volatility in equity markets over the last week, so it is worth discussing the impact each candidate’s administration could have on the U.S. and global economy. There are three areas in which both candidates will have the most impact:
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| Republican Win | Democrat Win |
| Corporate Taxes | Want to extend low corporate tax rates. This is unlikely unless the Republicans also sweep congress. | Want to increase corporate taxes, which could result in approximately 5-6% decline in corporate earnings. |
| Tariffs | Want to implement widespread import tariffs, which could result in upward inflationary pressure on prices in the short-term. | Expectation is for tariffs to remain at current levels, so no change on prices or impact to inflation. |
| Budget Deficit | Neither party has a plan for reducing the significant U.S. federal budget deficit. A democrat-win would likely result in increased spending, while a republican-win would result in a decrease in tax revenues – which both would result in a status quo or higher budget deficit. Either way, market concerns over the sustainability of debt levels could result in interest rates rising and reducing the available capital for business investment. | |
Despite the differences in policy objectives, the real going concern for the U.S. is its budget deficit – which unfortunately neither party has a meaningful strategy to manage. Due to the checks and balances built into the U.S. government, much of what the two candidates have promised on the campaign trial cannot be implemented without the support of a Congress that is also controlled by their respective parties. That scenario appears to be unlikely. Whatever the result of the election, as an investor here in Canada what you should be focusing on is how the new U.S. government after November 5th will impact markets and the global economy.
It is worth noting that despite the doom and gloom of the presidential election race in 2016, the U.S. economy certainly did not collapse thereafter, nor did it do so during the last presidential term. The U.S. market continues to outperform its peers in 2024 and we expect this momentum to persist into 2025. I continue to recommend investing in U.S. companies that have strong fundamentals, which will invariably result in improved growth prospects as inflation and economic activity continue to stabilize globally.
| Summary The week ahead will most certainly be an interesting one politically in the U.S., however for markets it should provide greater clarity on the direction of U.S. domestic and foreign policy. Whichever direction the people of the United States choose to take, the only things you can control are how you manage risk in your portfolio and the strategies that you implement to help you achieve your goals. Given recent volatility in markets, and the short-term uncertainty of interest rates given the continued resilience of the U.S. economy, my advice remains unchanged. You should be maintaining a neutral-weight investment strategy that is allocated to the level of risk you are comfortable with and that generates the long-term return required to meet your financial goals. If you or anyone you know would benefit from having a review of their wealth plan and would like to understand the strategies we implement here at RBC Dominion Securities, please connect with me via email here. |
